UNDERSTANDING ACCOUNTING TALK 13: One way to bankruptcy

There is a direct and intimate relationship between Liabilities and Equity: the more Liabilities, the less Equity, and vice versa. If there is not enough Equity, then the corporation, small business or proprietorship has to obtain on credit merchandise for resale or needed supplies & services, or has to borrow. If the liability is a Notes Payable (i.e. a promissory note), then the Expenses of the corporation, small business or proprietorship suffer an increase from the interests of the promissory note.

If interests wipe out the revenues after expenses are deducted, the corporation, small business or proprietorship has too much debt, is in trouble, and is in danger of going bankrupt or closing shop.